Dangers “Smart Money” & Thin Markets - Weekly Blog # 816

 

Mike Lipper’s Monday Morning Musings

Dangers “Smart Money” & Thin Markets

 

Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018

 

 

 

Christmas Breaks & Wishes

Like most weekly blog producers, I experienced an early December dilemma. Should I send out my seasonal best wishes to our readers and not produce the final December blog, or write it as usual? Not writing the blog was very tempting, but I then remembered George Washington’s very first military success in New Jersey. He and relatively small number of Patriots crossed the Delaware River and attacked the British (German Hessians) on Christmas Morning at Princeton.

 

My fear of a similar attack on our securities markets led to my decision to publish the blog. But to all our readers, I extend a very deep and heartfelt “Merry Christmas & Happy Holidays”

 

What Could Go Wrong?

1. I hope nothing.
2. The late December equity markets produced relatively light volume.
3. Below is a racetrack lesson on a not particularly distinguished bunch of horses registered for an unimportant race.

Late in the betting period there is a sudden surge in betting on a specific horse for no apparent reason. The chatter in the grandstand is that it was caused by external bookmakers balancing their betting exposure on a given horse. The presumption being that the clients of the bookmakers “knew” something that improved its probabilities. This surge was labeled “smart money” by those at the track. Sometimes, but not always, the chosen bet wins.

 

My fear is what market analysts call the distribution effect, because they understand what a third Obama White House doesn’t. That the initial absorber of sudden volume often tries to immediately offload as much of its liquidity volume on other players as possible. This secondary distribution can be repeated numerous times, enlarging the impact.

 

As happened during the last 2 hours on Wednesday, where all the major US stock indices fell significantly. Some observers pointed to a large trade, a series of large trades of a highly leveraged short-term derivative. By the end of the day individual securities were down multiple percentage points. Early Asian markets fell, but by the end of the trading day losses were small. On Thursday stocks rallied almost back to Wednesday’s opening and on Friday there was a slight gain.

 

This attack, like the one on the “British forces” at Princeton, did not have a material impact on the war other than to buoy up Washington’s spirits and please the Congress in Philadelphia.

 

I have no idea whether there will be other “smart money” surprises during the remainder of the year, but at least I am prepared.

 

Other Inputs Could Be Important

1. 58% of US households owned stocks in last 3 years, up from 53% previously. This included 21% from direct owners, up from 15% previously. (At some point this could have political implications). Only Estonia has a greater commitment to stocks.
2. All 3 major stock indices still have November price gaps.
3. Bankruptcies have risen to over 30% in the US and to over 25% in Germany.
4. Global deal flow is at a decade low.
5. PJIM forecasts sluggish growth for the next couple years.
6. FEDEX margins were materially down on a slight sales drop.
7. Many Wall Street bonuses were flat or up marginally.
8. The White House is considering an increase in Chinese tariffs, another pro-inflation move.
9. China announced new wide-ranging rules to reduce the number of on-line gaming hours. Not only did this wipe out $80 Billion in market value from the two largest Chinese game providers, but it also impacted other Chinese stocks and numerous stocks in other markets.
10. A picture is often worth more than a thousand words. The drawing room where the US President meets foreign leaders has 5 portraits of former presidents. The largest portrait is of FDR centered among the others. He appears crucial to the current President’s thinking. The similarities are pro-inflation, weak fighting forces, anti-business rules, higher taxes on the most productive, and isolationist policies. All of which turned a recession into a depression and encouraged our enemies. 

 

 

 

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